For
many years, business executives have viewed IT as a Black box consuming
money, other resources, and time. Most IT investments are funded as an
outgrowth of a business user's request. Describe if IT can be used to
drive cost savings?
by Matt Murphy
I think that is an interesting distinction between the manufacturing firms like Caterpillar and the more service-oriented firms that deal with insurance, finance, etc. Certainly IT has a different level of impact for different industries and market segments. However, I wanted to point out that two of the recent cases studies addressed this issue to some extent. IBM no doubt saw itself mainly as a hardware producer of mainframe servers. Yet when Gerstner took over he developed a new strategic direction that emphasized consulting and turned the company into an IT-enabled service firm. Admittedly his focus wasn't strictly on cost savings, but since the company was in such an earnings spiral initially he was required to make drastic cuts. One of the ways he did that was through massive layoffs of excess personnel. But perhaps more telling was the opportunity to reduce costs through IT consolidation and streamlining. In the case study it mentioned that "the company had 125 separate data centers worldwide and 128 CIOs. There were 3 I private and separate networks and literally hundreds of different configurations of PC installations. Data processing costs were a dramatic three times the industry average." Gerstner recognized that an area in which IBM should have been an industry leader, it was sorely lacking and therefore presented an IT investment represented an opportunity to dramatically reduce costs immediately. Over the first two years, "the cost of operating and running IT operations was cut in half, generating over $2 billion in cost savings. Key savings came from reducing the number of data centers from 155 to 3 regional "megacenters" fed by 11 "server farms" and a 60 percent reduction in headcount. IT leadership was centralized; 128 CIOs were reduced to 1. Networks were converted to one common protocol." This is one way of thinking about the possibilities of cost reduction in the context of IT investment. Arguably, this was an emergency measure and would not itself resulting in a long term or sustainable competitive advantage, but it clearly set the groundwork for what was to follow, namely "One IBM" and "e-business" which did provide a long lasting strategic advantage and boosted IBM to industry leadership again.
In the Boeing case, we see an aircraft manufacturer confronting a weakening demand and increased competition from Airbus, at the same time that the product is being undifferentiated. ("In 1999, Airbus outsold Boeing for the first time in history and Standard & Poor's analysts stated that there was no clear differentiation between Airbus and Boeing planes.") Condit's immediate stretegy of strenthening the core business did involve cost cutting measures designed to improve manufacturing, namely It "adopted simpler procedures for configuring aircraft to customer specifications, scheduling and ordering parts, and managing inventory; it also implemented the 'principles and practices of' lean' manufacturing to eliminate waste and promote greater efficiency.'" But its competitive advantage came from it's e-enabled advantage" strategy which aligned IT investment with its product development and information services to produce new service offerings. "These businesses focused primarily on airplane maintenance, flight operation solutions, and cabin/passenger services. Most notable of these was MyBoeingFleet.com, which was a Web portal to airplane data and applications hosted on Boeing servers." In addition, Boeing introduced Connextion by Boeing and Boeing's Air Traffic Management service, taking advantage of the many Boeing capabilities around the e-Enabled environment. This IT enabled advantage both created increased product differentiation and, by leveraging Boeing's investment in data and networking technology, increased cost savings as well.
In conclusion, I think it is possible for any firm, service or manufacturing oriented, to derive competitive advantage through cost reductions from better IT investment coupled with a long-term strategic vision.
by Matt Murphy
I think that is an interesting distinction between the manufacturing firms like Caterpillar and the more service-oriented firms that deal with insurance, finance, etc. Certainly IT has a different level of impact for different industries and market segments. However, I wanted to point out that two of the recent cases studies addressed this issue to some extent. IBM no doubt saw itself mainly as a hardware producer of mainframe servers. Yet when Gerstner took over he developed a new strategic direction that emphasized consulting and turned the company into an IT-enabled service firm. Admittedly his focus wasn't strictly on cost savings, but since the company was in such an earnings spiral initially he was required to make drastic cuts. One of the ways he did that was through massive layoffs of excess personnel. But perhaps more telling was the opportunity to reduce costs through IT consolidation and streamlining. In the case study it mentioned that "the company had 125 separate data centers worldwide and 128 CIOs. There were 3 I private and separate networks and literally hundreds of different configurations of PC installations. Data processing costs were a dramatic three times the industry average." Gerstner recognized that an area in which IBM should have been an industry leader, it was sorely lacking and therefore presented an IT investment represented an opportunity to dramatically reduce costs immediately. Over the first two years, "the cost of operating and running IT operations was cut in half, generating over $2 billion in cost savings. Key savings came from reducing the number of data centers from 155 to 3 regional "megacenters" fed by 11 "server farms" and a 60 percent reduction in headcount. IT leadership was centralized; 128 CIOs were reduced to 1. Networks were converted to one common protocol." This is one way of thinking about the possibilities of cost reduction in the context of IT investment. Arguably, this was an emergency measure and would not itself resulting in a long term or sustainable competitive advantage, but it clearly set the groundwork for what was to follow, namely "One IBM" and "e-business" which did provide a long lasting strategic advantage and boosted IBM to industry leadership again.
In the Boeing case, we see an aircraft manufacturer confronting a weakening demand and increased competition from Airbus, at the same time that the product is being undifferentiated. ("In 1999, Airbus outsold Boeing for the first time in history and Standard & Poor's analysts stated that there was no clear differentiation between Airbus and Boeing planes.") Condit's immediate stretegy of strenthening the core business did involve cost cutting measures designed to improve manufacturing, namely It "adopted simpler procedures for configuring aircraft to customer specifications, scheduling and ordering parts, and managing inventory; it also implemented the 'principles and practices of' lean' manufacturing to eliminate waste and promote greater efficiency.'" But its competitive advantage came from it's e-enabled advantage" strategy which aligned IT investment with its product development and information services to produce new service offerings. "These businesses focused primarily on airplane maintenance, flight operation solutions, and cabin/passenger services. Most notable of these was MyBoeingFleet.com, which was a Web portal to airplane data and applications hosted on Boeing servers." In addition, Boeing introduced Connextion by Boeing and Boeing's Air Traffic Management service, taking advantage of the many Boeing capabilities around the e-Enabled environment. This IT enabled advantage both created increased product differentiation and, by leveraging Boeing's investment in data and networking technology, increased cost savings as well.
In conclusion, I think it is possible for any firm, service or manufacturing oriented, to derive competitive advantage through cost reductions from better IT investment coupled with a long-term strategic vision.
No comments:
Post a Comment